When domestic and export markets could not longer soak up the mountains of steel and concrete being churned out, the SOE zombies started springing up.

The un-dead enterprises are essentially bankrupt but still operating or, in serious cases, receiving support to cover workers' pay, upkeep and debt servicing.

The chance of accidents - if not crisis - along this treacherous path will remain uncomfortably significant.

Wei Yao, China economist, Societe Generale

Their malign influence has spread to big commodity exporters such as Australia, with the collapse of iron ore and coal prices a symptom rather than cause of the supply glut.

Chinese Prime Minister Li Keqiang sounded like he meant business when he told senior economic bureaucrats late last year, "For those zombie enterprises with absolute over-capacity, we must ruthlessly bring down the knife."

His language to the annual gathering of the recent National People's Congress was somewhat more moderate, suggesting the zombies would be dealt with "proactively and prudently", but left little doubt that it was a top priority in terms of reform.

Coal and steel production to be cut

The bare bones of the zombie-culling policy were announced earlier this year and centre on steelmaking and coal production.

Steelmaking is to be reined in by 100 to 150 million tonnes - or around 13 per cent - over the next 3 to 5 years.

Coal production is targeted for a 9 per cent cut.

But is it enough to stop the zombies that have been devouring huge amounts of useful capital and resources since their markets died?

Probably not, but it is a start according to Societe Generale's China economist Wei Yao.

As is often the case with battling zombies, Yao noted it could be a long and treacherous journey, mired by unpleasant risks to employment, economic growth and, critically, the banking system.

"Given the immense challenge and risk inherent in the restructuring, especially given the associated non-performing debt, even if Chinese policy makers have a good idea of the long term picture and have started moving in the right direction, the chance of accidents - if not crisis - along this treacherous path will remain uncomfortably significant," Yao said.

Almost 2 million jobs could be shed

Clearly the big worry for the Communist Party leaders is the social upheaval even these modest cuts could cause.

"It seems that the leadership has come to recognise that keeping zombie companies alive is much more expensive than subsidising unemployed workers directly, both in the short term and long run," Yao observed.

The industrial sector as a whole may need at least a 10 per cent reduction in capacity, which would result in over 10 million job losses.

Wei Yao, China economist, Societe Generale

Around 1.8 million jobs - or about a quarter of workforce - in the steel and coal industries could go, and this would be concentrated in the big industrial provinces such as Hebei, Shanxi and Inner-Mongolia.

The reform package includes 100 billion yuan ($20 billion) over the next 2 years to assist unemployed and displaced workers.

Debt restructuring could overwhelm the banks

Then there's the not exactly insignificant impact on China's banks, which could be holding as much as 1 trillion yuan ($200 billion) in non-performing loans in steel and coal businesses.

The banks would be facing losses of around 700 billion yuan ($140 billion), given the average recovery rate of non-performing loans in China is around 30 per cent.

"We see ... a chance that the eventual cost of the debt restructuring could either overwhelm fiscal resources ... and/or cause some material damage to some weak banks at some point," Yao warned.

But this is just the steel and coal sectors.

"The big picture is nearly a dozen industries, accounting for 50 per cent of total industrial sector assets, suffer from entrenched oversupply," Yao said.

"We think that the industrial sector as a whole may need at least a 10 per cent reduction in capacity, which would result in over 10 million job losses and 8 to 10 trillion yuan in non-performing loans."

China facing a steady decline in growth: Morgan Stanley

The headline out of the NPC was a cut in the GDP growth target from 7 per cent to a broader range of 6.5 to 7 per cent next year.

The longer-term ambition is to have doubled GDP per head between 2010 and 2020, which would require a still robust growth of 6.5 per cent on average for the next five years.

However, there remains a tricky balance, not to mention inherent conflict, in maintaining such relatively robust growth while tackling industrial overcapacity.

After mulling over the events that played out at the NPC, the Morgan Stanley Asian strategy team noted the current policy approach just continues to borrow from China's economic future, driving down returns on investment, entrenching disinflationary pressures and pushing up debt.

That means, according to Morgan Stanley, China will be stuck in a downward growth trend with mini-cycles of weak recoveries and slowdowns, driven by bouts of stimulus with diminishing effectiveness.

The investment bank's bear case includes an increase in the speed of zombie slaying.

That would most likely cause even more short-term pain through weaker production growth, an increase in workers being laid off and even more bad debts being racked up by the banks.